January 24, 2018 / 3:27 PM / a year ago

UPDATE 2-Airline shares sink after United Air spurs price war fears

(Adds background, details)

By Alana Wise

Jan 24 (Reuters) - Shares of United Continental Holdings Inc plummeted in Wednesday morning trading, triggering a drop in shares across the sector, after it promised to increase capacity and compete head-to-head with budget carriers, stirring fears of a deepening industry price war.

United shares fell 12.65 percent to $68.15 in midday trading as investors reacted to the carrier's plan to add more seats on its routes and aggressively compete with low-cost rivals in the hopes of eventually improving its sagging bottom line.

The dramatic drop in the share price is the second such fall in as many quarters, as the Chicago-based airline has struggled to maintain control of its U.S. hubs amid increased competition from budget rivals.

"The best way to compete with a low-cost carrier is match their prices," United President Scott Kirby told analysts and investors on Tuesday. "We can't let low-cost carriers have price advantages in our hubs."

Investor unease rolled over to rival shares as well, sending American Airlines stocks down 7.76 percent, and Delta Air Lines down 6.56 percent.

The bulk of investment community concerns lie in United's decision to beef up its capacity by between 4 percent and 6 percent in 2018, and at a similar clip in 2019 and 2020, on the grounds that it would give the carrier a competitive edge in its fight against low-cost airlines.

In a Wednesday research note, CFRA Research analyst Jim Corridore lowered the firm's opinion of United shares.

"(United) unveils plan to right size hubs and raise connecting and premium traffic. We think this is the right course of action, but it will take time to work, will drive near-term unit revenues down and risk a competitive response," Corridore wrote. "We will wait to see how this plays out before recommending shares."

United's financial results came on the heels of an uplifting fourth-quarter and full-year review from rival Delta Air Lines earlier this month.

American Airlines, Southwest Airlines, JetBlue Airways and Alaska Airlines disclose their results on Thursday. (Reporting by Alana Wise in New York and Rachit Vats in Bengaluru; Editing by Supriya Kurane and Susan Thomas)

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